In today’s episode we’re talking about an emerging model of gaming called play to earn, in which players can make actual money based on how much time and effort they put into a game. Play to earn is also part of broader trends — the changing relationship between players and platforms, new incentives for participants in blockchain-based networks, and the new internet era that is coming to be known as a web3.

The top play-to-earn game is called Axie Infinity, operated by a Vietnam-based company called Sky Mavis. Players of the game acquire unique digital pets called Axies, and battle other teams of Axies. These NFT Axies can be created and sold using the game’s in-game currency, SLP, which can be traded for traditional currency.

Think of it as Pokemon on the blockchain, with a social network built-in, and an actual economy, and even companies built around the game that help players onboard and loan them money to get started playing. The game has made more than $3 billion in total sales since launching in March 2018, with much of its early growth in the Philippines.

(As a reminder, none of the following should be taken as investment advice, please see for more important information.)

Our guests today are Jeff Zirlin, the cofounder of Sky Mavis; Gabby Dizon, the cofounder of Yield Guild Games, a play-to-earn-gaming guild that gives players the resources to start playing; and a16z crypto general partner Arianna Simpson.

They talk to a16z’s Zoran Basich about the larger tech trends that enabled the emergence of play to earn, why and where it caught on first, and the role of community, as well as the challenges, which include onboarding and scalability, and the economic sustainability of this model.

Transcript below:

Axie and the beginnings of play-to-earn

Jeff: This is something that took almost four years to marinate. So, a lot of the original Axie community members and founders were from the CryptoKitty community, where we saw that the production of new NFTs had to be related in some ways to actual work and effort. This would basically prevent hyperinflation. So in the first iteration of the Axie battle system, we had experience points and these experience points could be used to breed Axies. We then had the idea and a lot of our players were requesting that these experience points be tradable tokens. And so, we tokenized them.

And then we saw that our players had actually created a liquidity pool on Uniswap, which is a decentralized exchange for these tokens. We then realized that, hey, you can actually calculate an expected hourly wage for playing Axie because there’s guaranteed liquidity in this pool.

So, I think that was really the moment that we saw the potential for it. We put out a post in January of 2020 where we saw that there was this intersection of NFTs and DeFi that was creating something that we then dubbed play-to-earn, and I think that might be the first time that that terminology was used, at least the first time where it was used in a non-speculative way

Zoran: One key thing to note here is that people have to pay a significant amount of money to get started – they have to download crypto wallets and buy three Axies, which can cost upwards of $1,000, with prices fluctuating. So Gabby, you saw this from the ground in the Philiipines — what did you see in this economic model?

Gabby: So I’ve been in the game industry for almost 20 years and actually joined the Axie community in late 2018 as a player. And what I saw last year is that people from my home country in the Philippines had started discovering and playing Axie as a way to kind of escape the economic hardship of the lockdown. And these were people who weren’t crypto enthusiasts. These were regular people that were stuck at home that had no jobs.

So, came upon the idea of a guild as a way to scale the efforts to introduce people to the world of play-to-earn and provide Axies via a scholarship program that would provide access to people around the world, not just from the Philippines, but across Southeast Asia, in India, in Latin America, and other countries to be able to play the game and earn money from it without having to afford the assets upfront.

And what we do is that we kind of act as a player collective where we invest in a lot of these assets and then form the communities around these different games where people can participate into these networks so that it’s not anymore a hurdle to get into a game like Axie Infinity because I can’t afford three Axies.

The conditions for growth — the Philippines and beyond

Zoran: You touched on the growth in places like the Philippines. What were the conditions that enabled that? Why did that spark catch there? And what does that tell us about building communities in the future?

Jeff: I think that there are a couple of unique things related to the Philippines. The Philippines loves mobile games. There’s relatively high crypto literacy. It’s a very communal culture where information and trends can spread very quickly. Filipinos have traditionally been early adopters to many social networks and platforms like Facebook. With the Philippines specifically, I think there were a lot of really special circumstances that basically allowed it to break out ahead of the rest of the world, but I do think that it’s only around nine months ahead of the rest of the emerging market economies

How play-to-earn reflects broader web3 trends

Zoran: So if this model indeed spreads and continues to grow, that suggests there’s something bigger going on here – what is that, what transition are we actually seeing?

Arianna: We think that the people creating the value should be participating in the upside. And that’s really the core belief at the center of what’s happening with web3. People are earning their livelihood on Axie, and so having the ability to not have all the value retained by the platform, but actually, pass it back to the community, the creators, the people who, again, are really responsible for building the value is, I think, an unstoppable movement

Jeff: One of the frameworks that we can think about is, like, okay, who are the middlemen that are getting removed? And how is the value that was being extracted by those middlemen shared with the actual users and stakeholders of the platform? So with Axie, I think what’s happened is that the app stores and the game publishers have been removed from the equation. They traditionally take 50%-plus of the revenue that’s generated by a game. We’ve removed them. We don’t use them. And we’re sharing that value with the people who are actually driving traction for our network, which is the community.

How sustainable is it?

Zoran: Okay, people are paying to get in and they are interacting with their characters, and they’re competing, and they’re earning rewards. But help me understand the sustainability of that. How do you think about the underlying economic model here?

Jeff: So one of the ways to look at it is right now, Axie is a little bit of a growth-dependent economy, just like any emerging market nation. It is a little bit dependent on capital inflows. But long term, it’s really important for us to have players that are in the economy spending because they think that the game is really fun or that they see ways to trade, like, money for power or respect. And the more Axie becomes like a real social network, a nation, the more opportunities for those types of value exchanges to arise. And we have framed Axie as a social network as well as a game since the early days. And this is becoming more and more true as, you know, we’ve done things like max out our Discord.

Zoran: What are the key factors to making play-to-earn sustainable? Like, how do you think about potential ceilings on capital inflows and participation?

Arianna: In many ways, these economies are going to be similar to real-world economies. They’re very complex and I think continuing to manage the capital and token supply and all of the dynamics within these metaverses is going to be a real challenge.

One of the key things in my mind is making sure that there continue to be different groups of players who are participating for different reasons and deriving different kinds of value. So, people might be there purely because they enjoy playing the game or because they get a lot of personal fulfillment out of coaching others. In many cases, it might be financial. There are a number of different reasons why people might want to be playing the game and engaging in the community. But as long as the players who are putting in additional capital derive other kinds of enjoyment from it, that’s fine. And that’s actually not at all dissimilar to the real-world economy. I might be wealthier and I might pay someone to do something I don’t want to do and somebody might, in exchange, pay me to do something they don’t want to do.

And so as long as there continues to be a robust ecosystem of participants who are there for a variety of reasons, I think that really drives things forward.

Zoran: What is the balance between people who are trading within the economy versus taking money out of the economy, like, you know, transferring it to fiat, because people are paying their bills, right? And so they have a decision to make about how much to kind of put back into the system versus take out. What are the trends there? And how does that affect the business model?

Jeff: In terms of the capital flows, we see that there are far more funds that are being deposited into our ecosystems than withdrawn. Only 4% of Axies are for sale on the marketplace. So, I think this shows the emotional connection and the fact that people don’t just see this about money. It’s also something that is giving them access to new opportunities, social networks, and is a lot of fun

So, right now, I think, it’s easier to balance the economy when we’re growing really quickly and.the animal spirits are active. Long term it will be about continuing to make sure that the community is insanely fun to be a part of and the game is insanely fun to play.

The role of community

Zoran: But what is it that keep people feeling as though they’re part of a community? There is some bigger, evangelizing feeling here than just, “Yeah, I’m gonna make a few bucks.” Right?

Jeff: Sure. I think it boils down to this shared economic alignment, but also cultural alignment. This community has been around since before NFTs were popular and, you know, what everyone in the world was interested in. Right? So, this exploration, I think that’s part of the DNA of the community. And as new entrants come in, they learn about this and they actually have some of the ideals transferred into them as they join. So, I think that’s been really important. And the community is amazing at the education and the onboarding. Eighty percent of our users are coming from referrals.

Arianna: I think it just demonstrates the enthusiasm that people have for what’s happening, both in physical space, by the way — the meetups have incredible attendance, people are really organizing themselves on the ground — but also, of course, in the digital realm, so in Axie itself, in the Discord, in the Substacks, etc. So, there’s just a stickiness that comes from people feeling like this community is theirs and they are benefiting from being members of it rather than, you know, having someone extracting value from them.

Zoran: But it seems like there’s kind of a paradox here, right? Because one of the things about legacy systems, whether it’s financial systems or gaming, is that they’re very sticky. It’s hard to move your account from one bank to another or you can’t move your in-game goods from one game to another. And crypto has kind of changed that and it’s made it much more portable. Isn’t it easy for some other game to pop up that is just as appealing and the characters are just as cute and your community might migrate over there?

Jeff: What we’ve built is not just the gaming community, it is, in many ways, a nation where people have shared cultural values, there’s overlaps and entertainment, there’s even this lingo or jargon similar to language. We have this very deep economy. So, I think it is much harder with this type of network to uproot a community and transplant them into a new universe where they don’t have a stake in it. We’re seeing people in the real world form Axie communities where you know all the people in your town or your city who plays Axie Infinity. And it has network effects, right? The more people that own Axie tokens, the more people that own Axies, the more people that own land within the universe, the deeper entrenched these economic and social relationships get with each other.

Gabby: Yeah. One of the hallmarks of the shift between web2 to web3 is that the communities are opt-in and they’re incentive-aligned by shared economic ownership, by the kind of traits that lead people to share the same affiliation, the same tribe around maybe certain assets or certain game universe. People stay here because they choose to be here, and they help build the culture of a tribe. There’s a shared economic incentive, there’s a cultural incentive. But if people want to quit that network and leave and join another network, no one is preventing them to do so.

Zoran: So speaking of user choices and user behavior, how is that changing? Because YGG is funding players, bringing them into the game, helping them get started, you’ve got a close-up view of this – is there a pattern of behavior, or different modes of participation that are evolving?

Gabby: We see ourselves as a necessary layer to bring people from the real world into the metaverse, especially for those that can’t afford it. But once they’re there and have an income, we actually encourage them to turn people from gamers to investors.

So, the first few cycles of people are earning money via SLP. They sell it for fiat, put food on the table, pay their bills. What we see is that when they’re a few cycles in and they have some excess income, many of them for the first time in their lives, the behavioral patterns actually change. People have more of an investor mindset. And now they think about, “Do I buy Axies for myself and graduate from this program so that the next person can benefit from the Axies that I was using? Do I buy Axies for my family members so that they can start earning money too? Do I buy my first piece of land in Axie Infinity and become a virtual landowner?” And so on and so forth.

Scalability challenges and Ronin

Zoran: Jeff, you mentioned CryptoKitties earlier. That’s the most prominent example before this of a game that really reached some level of mainstream success. And it kind of brought down Ethereum for a while, right? So in terms of growth and scalability, what are the challenges?

Jeff: In our ecosystem we have a lot of small, kind of low-value transactions that are really key to our user base in the emerging markets. And these were things that were basically priced out on Ethereum, where on Ethereum they might be $5 to $15 and obviously we’ve been in a bull market and that’s also coincided with rising gas costs on Ethereum as well. We were at the mercy where the success of the Ethereum ecosystem and all these DeFi applications was actually strangling out our growth, right? It was pricing our users out. We were in a situation where we really needed to migrate the majority of our transactions onto our own infrastructure.

It’s really this April with the launch of Ronin, which is our Ethereum sidechain, where we added that key piece to the equation, which allowed for our growth. We were around 38,000 daily active users in April before the launch of Ronin. And we just hit 2.4 million daily active users.

Zoran: What exactly did Ronin, this sidechain, do for you — what did it unlock?

Jeff: It allowed for the proliferation of the scholarship model, because there are a lot of transactions that are involved in running a scholarship program. So, breeding Axies, sending Axies to different accounts so that they can be distributed to scholars, claiming in-game rewards, these are all transactions on a blockchain that on Ethereum would cost a lot and, oftentimes, take a while, whereas on Ronin, these have all become very cheap, free up until now, and much faster.

That’s why we call Ronin Ronin. Right? Ronin is the samurai without a master. This was all about taking our destiny into our own hands where we could be the ones that determined our growth path rather than having to be a taker of market conditions and gas prices on Ethereum.

Arianna: I think that just really tells a critical story. If they hadn’t done that, I think the game would have obviously continued to grow, but been capped in the way that it was before. And so once there was that infrastructure put in place, there was an incredible unlock, which is really visible from the chart.

Onboarding into the game

Zoran: And so the other challenge too is onboarding, in terms of the steps required to start playing the game. You have to download multiple wallets and you have to, obviously, pay some money. And on the one hand, that shows how appealing the game is for people that they are willing to take these steps. But on the other hand, you want it to become easier.

Jeff: It is still incredibly difficult to get started with Axie. So, a lot of our development roadmap is aimed at reducing these barriers, specifically, for example, right now, if you are interested in Axie and you want to play, you then have to figure out which Axies you actually want to buy. This might involve doing a lot of research on the internet, maybe watching YouTube tutorials. And you’re basically buying characters for a game that you’ve never played before.

We will be releasing an upgraded battle system. And one of the features of that will be kind of this demo tutorial where everyone will be able to download Axie, get a free team of starter Axies, learn about the game, figure out if they actually love the gameplay, love the community before they have to make any economic decisions. So, we think that that’s going to be a really important stage between awareness and activation.

There are also payment on-ramp and off-ramp frictions that we can work with partners on to also improve that onboarding experience.

Gabby: And, you know, That’s where the community steps in. And what I love about it is that you’re replacing the middlemen such as Facebook and Google with community-based structures that onboard people into games like Axie, teach them how to play the game, how to earn money, how to use crypto, onboard the wallet. And for me, it’s like web2 reduced people into statistics that it’s just about daily active users. And with web3, with this community-based acquisition growth returning them back into individuals, again, individuals who are like creating content, learning how to play, people who are earning money, and we see all of these stories of people whose lives were profoundly changed by earning money And I think that’s really significant.

Play-to-earn and the future of work

Zoran: The idea of work is really important here. I mean, so far, it’s players, and people funding those players. But when you squint your eyes a little bit into the future, what kinds of new jobs do you foresee, whether it’s specific jobs or categories of jobs?

Jeff: There are many different archetypes of Axie players, right? There are the competitive battlers. There are the collectors. There are the scholarship managers, as well as the scholars who are, you know, primarily kind of farming tokens and selling them within the ecosystem. There are just people who are Axie holders, there are the content creators and the educators. And many players see themselves as more than one.

I think what we’ll see, within at least the Axie ecosystem, is that the different types of gamers will start to correlate or map to different professions, right? So, there might be someone who specializes in, you know, creating consumables, like a potion maker. Might be like, I don’t know, the version of a pharmacist. You’ll have your gladiator which might be, like, similar to, your athlete. So, we’re starting to see the rise of the competitive Axie players who are able to live off of, you know, winning tournaments and climbing the leaderboard.

I think that we’ll also see politicians arise in the Axie universe — people who are leading committees, for example, and thinking about the best use of funds, that might be the treasury, that might be the ecosystem, that might be, like, putting forth governance proposals. It might be creating requests for funding for different initiatives. You might have people who are focused on accumulating or harvesting certain materials. And that might be like the version of a farmhand. Right? So, someone who’s going on to Axie land, for example, and harvesting resources. I think that’s, like, an archetype that we’ve seen in the past, but I think has never really truly broken out and I think it’s had its breakout moment with Axie and the rise of YGG and similar institutions.

Zoran: We’re hearing a lot about web3 and the metaverse, and other buzzy phrases, all kind of revolving around this idea of more and more of our lives being lived online, in increasingly deep ways. Some of these trends we’re talking about with play-to-earn, do they go beyond games, or even jobs, and just become part of how we live?

Gabby: Yeah. This intersection between crypto and the creator economy, it’s actually one of the things that excites me the most about the future of work and where people are going in the metaverse. So, when you see these games in virtual worlds, I think it will not be just in games like what we’re seeing now. There will be virtual worlds where people can be, for example, going to the bank, interacting with a DeFi application, and doing what we just think of as work but they’re doing this in these virtual worlds that may look like games, but they’re actually just the interface for doing this type of work in the virtual world. So, I think more and more the blending of work and play will come together and we’ll be using crypto as a means to exchange value, but they may not necessarily be games as we know them today.

Gaming as a pathway to crypto adoption

Zoran: And I wonder what you think about crypto adoption overall —there’s still a fair amount of skepticism by a lot of people. What does play-to-earn and gaming, in general, mean for crypto adoption?

Arianna: Gaming is going to be a key way in which the next hundreds of millions of users onboard into crypto because, historically, you know, it hasn’t been easy to get involved and the barrier to entry is pretty high, the technical hurdles are fairly high. And it can be a little bit scary. There’s real money at stake. And what games offer is a much friendlier, more approachable onboard. You have these cute digital pets. You can go on and meet other players. We’ve talked about a real sense of community. And so it’s just a much more approachable way to start playing around in the space. And so we see that players might come in through a game and then, you know, once they have a wallet, start to experiment with other web3 products and experiences, and really expand outward from there.

Zoran: And how much of the crypto will end up being under the hood in the future? Will people kind of be transacting and not even thinking about it as crypto, but, you know, buying things with credit cards? Tell me how you think about that.

Jeff: What we need to do as product developers is to make sure that our user base and our prospective users really understand what the benefits of our products are, right? The benefits are derivations of blockchain technology, I don’t think they need to understand, like, how blockchain actually creates these benefits. So, I think when they see a fun, cute game where they can actually earn real value, I think that’s good. That’s sufficient. And I think that’s a strong enough pull. I think that learning how to use blockchain, I think these are more emergent benefits that they might get. Once they get involved, you know, they might kind of fall down the rabbit hole. We love seeing our user base go through that process as well. But I think in terms of the awareness phase, the benefits should be crystal clear. Even though the onboarding is difficult, people and organizations are onboarding by hand the next generation of blockchain users.

Zoran: Arianna, Jeff, Gabby, thank you so much for being with us today.

Gabby: Thank you.

Jeff: Thanks for having us.

Arianna: Thanks, Zoran.

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